Category: Economics

Are you in the American middle class?

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About half of American adults lived in middle-income households in 2014, according to a new Pew Research Center analysis of government data. In percentage terms, 51% of adults lived in middle-income households, 29% in lower-income households and 20% in upper-income households.

Our updated calculator below lets you find out which group you are in – first compared with other adults in your metropolitan area and among American adults overall, and then compared with other adults in the U.S. similar to you in education, age, race or ethnicity, and marital status.

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Click on graphic to reach article and calculator

New data has updated this calculator – released last December.

Our Immigrants, Our Strength

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Click to enlarge

Life jackets along the NYC waterfront — a reminder

❝ World leaders are gathering in New York this week for the United Nations General Assembly, and at the top of their agenda sits a refugee crisis that has reached a level of urgency not seen since World War II. The United Nations Summit for Refugees and Migrants and President Obama’s Leaders’ Summit on Refugees represent a watershed moment that is putting a global spotlight on the need for an effective response to a growing humanitarian crisis…

❝ As the mayors of three great global cities — New York, Paris and London — we urge the world leaders assembling at the United Nations to take decisive action to provide relief and safe haven to refugees fleeing conflict and migrants fleeing economic hardship, and to support those who are already doing this work.

We will do our part, too. Our cities pledge to continue to stand for inclusivity, and that is why our cities support services and programs that help all residents, including our diverse immigrant communities, feel welcome, so that every resident feels part of our great cities…

❝ Investing in the integration of refugees and immigrants is not only the right thing to do, it is also the smart thing to do. Refugees and other foreign-born residents bring needed skills and enhance the vitality and growth of local economies, and their presence has long benefited our three cities.

❝ Our cities are also on the front lines of helping those fleeing violence or persecution connect to critical, often lifesaving, services. Paris is one of the first major municipalities to open a refugee center in the heart of the city. Beginning in October, the center will provide services and basic necessities, as well as administrative support, to 400 refugees. New York has placed city representatives in immigration court to connect the thousands of unaccompanied children from Central America seeking asylum to crucial health, education and other social services. Last year London boroughs provided support to more than 1,000 unaccompanied, asylum-seeking children, and the city is now developing new ways of working with communities to offer support to resettled refugees.

❝ We know policies that embrace diversity and promote inclusion are successful. We call on world leaders to adopt a similar welcoming and collaborative spirit on behalf of the refugees all over the world during the summit meeting this week. Our cities stand united in the call for inclusivity. It is part of who we are as citizens of diverse and thriving cities.

RTFA for the details. This was published by the mayors of New York City, Paris and London. Not only cities for the successful – but, for the people of those cities trying to build anew.

Bigotry is expensive

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❝ It seems like every day there’s a new battle being fought over discrimination in the U.S. There was the Ellen Pao trial and its claims of sexual bias at Silicon Valley’s leading venture capital firm, the continuing revelations of endemic racial discrimination in Ferguson, Missouri, and the so-called religious freedom law in Indiana that many believe is a thinly veiled cover for anti-gay discrimination.

If racial and gender discrimination were purely matters of fairness, ending them would still be a worthy cause. But there is another reason to combat discrimination — it boosts the economy.

❝ The basic reason is misallocation of resources. In an economy functioning at tip-top efficiency, people do the job that they’re most efficient at doing, relative to other jobs they could be doing, and relative to other people in the economy. That’s called the principle of comparative advantage, and it dates back at least to the famous 19th century economist David Ricardo. Notice that nowhere does the principle of comparative advantage leave room for race or gender. These things, in and of themselves, are simply not important for economic efficiency — the only thing that matters is how well people can perform their jobs.

❝ So if a society bases its decisions of who gets which job on race and gender, it’s going to be sacrificing efficiency. If women aren’t allowed to be doctors, the talent pool for doctors will be diluted, and wages will be pushed up too high, choking off output. This would be true even in a bizarro world where every man was a better doctor than every woman! Of course that’s not even remotely true, but the point is, the theory of comparative advantage doesn’t care about average differences in absolute ability. If you’re making rules about which type of people are allowed to do which type of job, you’re hurting the economy.

❝ Just how big of a difference does this make? A team of top economists has recently studied the question, and their results are pretty startling. In “The Allocation of Talent and Economic Growth,” economists Chang-Tai Hsieh and Erik Hurst of the University of Chicago Booth Business School and Charles Jones and Peter Klenow of Stanford estimate that one fifth of total growth in U.S. output per worker between 1960 and 2008 was due to a decline in discrimination…

The authors’ approach is clever. They treat discrimination as a tax. If you think about it, this makes sense — just as taxes discourage business activity, discrimination in employment or education discourages its victims from taking certain jobs or getting training for certain skills. The authors explicitly allow for the possibility that different groups might have different average ability levels with respect to different occupations. They also count home production — child care and housework — as a real contribution to gross domestic product. They put these assumptions into a Roy model, which is a very flexible general equilibrium model that economists typically use when evaluating people’s occupational choices…

❝ Simply reducing individual prejudice would be a wonderful way of attacking discrimination at the source. That’s why the continuing social movements for greater racial and gender equality are valuable — not just for reasons of fairness but for our economic future.

RTFA for more about the study’s methodology. Should be required reading for all the politicians who waste thousands of hours, million of dollar$, defending the indefensible bigotry they install to please their favorite idjit voters.

The God business is worth more than Apple, Amazon and Google combined

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Did they count the gold?

❝ Religion in the United States is worth $1.2 trillion a year, making it equivalent to the 15th largest national economy in the world…

The faith economy has a higher value than the combined revenues of the top 10 technology companies in the US, including Apple, Amazon and Google, says the analysis from Georgetown University…

❝ The Socioeconomic Contributions of Religion to American Society: An Empirical Analysis calculated the $1.2tn figure by estimating the value of religious institutions, including healthcare facilities, schools, daycare and charities; media; businesses with faith backgrounds; the kosher and halal food markets; social and philanthropic programmes; and staff and overheads for congregations.

Co-author Brian Grim said it was a conservative estimate. More than 344,000 congregations across the US collectively employ hundreds of thousands of staff and buy billions of dollars worth of goods and services.
More than 150 million Americans, almost half the population, are members of faith congregations, according to the report. Although numbers are declining, the sums spent by religious organisations on social programmes have tripled in the past 15 years, to $9bn.

❝ The analysis did not take account of the value of financial or physical assets held by religious groups. Neither did it account for “the negative impacts that occur in some religious communities, including … such things as the abuse of children by some clergy, cases of fraud, and the possibility of being recruitment sites for violent extremism”.

Didn’t notice any mention [in the article] of the dollar value of tax avoidance of religion in America. A nice addition to any profitable business.

Moving from Globalization 2.0 to 3.0

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While seemingly elegant in theory, globalization suffers in practice. That is the lesson of Brexit and of the rise of Donald Trump in the United States. And it also underpins the increasingly virulent anti-China backlash now sweeping the world. Those who worship at the altar of free trade – including me – must come to grips with this glaring disconnect.

Truth be known, there is no rigorous theory of globalization. The best that economists can offer is David Ricardo’s early nineteenth-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased cross-border trade. Trade liberalization – the elixir of globalization – promises benefits for all…

In the US, Trump’s ascendancy and the political traction gained by Senator Bernie Sanders’s primary campaign reflect many of the same sentiments that led to Brexit. From immigration to trade liberalization, economic pressures on a beleaguered middle class contradict the core promises of globalization…

In short, globalization has lost its political support – unsurprising in a world that bears little resemblance to the one inhabited by Ricardo two centuries ago. Ricardo’s arguments, couched in terms of England’s and Portugal’s comparative advantages in cloth and wine, respectively, hardly seem relevant for today’s hyper-connected, knowledge-based world. The Nobel laureate Paul Samuelson, who led the way in translating Ricardian foundations into modern economics, reached a similar conclusion late in his life, when he pointed out how a disruptive low-wage technology imitator like China could turn the theory of comparative advantage inside out…

Of course, this isn’t the first time that globalization has run into trouble. Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late nineteenth and early twentieth centuries – met its demise between World War I and the Great Depression. Global trade fell by some 60% from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies…

Similarly, the means of Globalization 2.0 are far more sophisticated than those of its antecedent. The connectivity of Globalization 1.0 occurred via ships and eventually railroads and motor vehicles. Today, these transportation systems are far more advanced – augmented by the Internet and its enhancement of global supply chains. The Internet has also enabled instantaneous cross-border dissemination of knowledge-based services such as software programming, engineering and design, medical screening, and accounting, legal, and consulting work.

The sharpest contrast between the two waves of globalization is in the speed of technology absorption and disruption. New information technologies have been adopted at an unusually rapid rate. It took only five years for 50 million US households to begin surfing the Internet, whereas it took 38 years for a similar number to gain access to radios…

Unfortunately, safety-net programs to help trade-displaced or trade-pressured workers are just as obsolete as theories of comparative advantage…

The design of more enlightened policies must account for the powerful pressures now bearing down on a much broader array of workers. The hyper-speed of Globalization 2.0 suggests the need for quicker triggers and wider coverage for worker retraining, relocation allowances, job-search assistance, wage insurance for older workers, and longer-duration unemployment benefits.

Stephen Roach cautions, “the alternative – whether it is Brexit or America’s new isolationism – is an accident waiting to happen.” Globalization is not only inevitable, the most recent wave is complete. The backwash is populated with opportunist capitalists jumping ship this time for a 10% wage advantage instead of greater – some fleeing China to Mexico for the second time. Replicating the short lurch that followed the passage of NAFTA in the Clinton years.

What comes next in emerging markets, newly-developed and developing economies will be friendly competition and cooperation. That already is a central point of advocacy in China and ASEAN nations. Obama and President Hillary [probably] are stuck with the stereotypical American political solution of playing the blame game to unemployed and underemployed constituents – while Congressional know-nothings continue their death spiral-dance with religious conservatives hoping to retain their seat-of-the-pants veto of any legislation that might aid American workers. We’re faced with the potential of nothing changing in Washington until the elections of 2022 and 2024.

OTOH — If Americans are bright enough to remove bigots-pretending-to-be-conservatives from Congressional power in the November election, there may be an opportunity to implement the sort of safety net Dr. Roach suggests. We’ll see. Part of being both an optimist and cynic is my confidence in science and knowledge aiding our species in solving the problems we create. Just not in my lifetime.

Central bankers around the world are stuck at zero — plead with politicians to take action

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Christopher Sims, Nobel Laureate — MercoPress

❝ Central bankers in charge of the vast bulk of the world’s economy delved deep into the weeds of money markets and interest rates over a three-day conference recently, and emerged with a common plea to their colleagues in the rest of government: please help.

❝ Mired in a world of low growth, low inflation and low interest rates, officials from the Federal Reserve, Bank of Japan and the European Central Bank said their efforts to bolster the economy through monetary policy may falter unless elected leaders stepped forward with bold measures. These would range from immigration reform in Japan to structural changes to boost productivity and growth in the U.S. and Europe.

Without that, they said, it would be hard to convince markets and households that things will get better, and encourage the shift in mood many economists feel are needed to improve economic performance worldwide. During a Saturday session at the symposium, such a slump in expectations about inflation and about other aspects of the economy was cited as a central problem complicating central banks’ efforts to reach inflation targets and dimming prospects in Japan and Europe…

❝ In an…address by Princeton University economist Christopher Sims, policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.

“Fiscal expansion can replace ineffective monetary policy at the zero lower bound,” Sims said. “It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.”

The usual Reagan rationales for doing nothing infect what passes for 21st Century conservatism. Absence of backbone and craptastic excuses characterize liberal political parties outside of the milieu of European labor parties. The time for ennui is over. Bernie Sanders’ campaign in the United States proved that.

What can spending on infrastructure do for your state?

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❝ Here’s something all of divided America should be able to agree on: Smart infrastructure investment works. For evidence, look at Colorado, where elected officials of both parties trace an economic boom to a decision 27 years ago to spend more than $2 billion on a new Denver airport.

❝ The Denver International Airport was the brainchild of Federico Pena, who was elected mayor in 1983 and who would become the Secretary of the Transportation and Energy departments in the Clinton administration. It was assailed as a boondoggle by some local businessmen in a campaign led by Roger Ailes, then a Republican media consultant and later the impresario of Fox News.

❝ The airport was financed by revenue bonds, which proved to be among the best performers in the market for state and local government debt. Today it is the linchpin of Colorado’s transition to a global 21st-century economy flush with high-paying jobs and enhanced by daily nonstop flights to Asia, Central America and Europe.

Colorado has many economic advantages, from shale to ski resorts and beyond, but state officials say the new airport was the catalyst needed to set off the boom. “It’s foundational,” Governor John W. Hickenlooper said in an interview last month in his statehouse office. “I mean we look at infrastructure” as the central element “to build our new economy around.”

❝ The airport’s…annual economic impact today exceeds $26 billion, more than eight times [the old airport] Stapleton’s in 1984…It has generated more than 270,000 jobs, almost twice the comparable figure for Stapleton 32 years ago, and $295 million in concession gross revenue, compared to $45 million for Stapleton in 1994…Passenger traffic was a record 27.5 million for the six months through June, up 6.8 percent from 2015. Stapleton had 33.1 million passengers in all of 1994…

❝ Colorado’s economy, meanwhile, is leaving behind its reliance on mining and energy. Since 2012, the accommodations and food services industry grew 22.5 percent, faster than in any other state except Texas and California, according to Bloomberg data. Health care and social assistance companies expanded 17.4 percent, the most for any state. Wholesale trade grew 17.7 percent, the fourth best in the U.S. since 2014, and finance and insurance grew 7.4 percent, bettered only by Utah and Nevada. Today, material and energy make up less than 30 percent of the total market capitalization of Colorado’s publicly traded companies, down from 53 percent in 2010.

And that’s the killer for me. Living in New Mexico, everything that was backwards about Colorado in the 1980’s is still alive and well in New Mexico. Our Republican governor has only one response to a budget defined by oil and gas production in a downturn. Austerity, cut the budget for everything from education to social welfare. Infrastructure upgrades started by the previous Democrat governor are still incomplete – mostly because she hates to admit a Democrat did something useful.

And I’m not confident the likely return to a majority Democrat state legislature is going to change our reliance on extractive industries and military subsidies.

The EpiPen tale illustrates how broadly greed is part of the pharma industry

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❝ The EpiPen pricing controversy is enough to trigger mental anaphylactic shock. First, Mylan raised the list price of EpiPens to more than $600 a pair. When protests predictably erupted, Chief Executive Officer Heather Bresch went on TV to say that if she cut the price of EpiPens, some people wouldn’t be able to get them anymore. Which is weird, because usually a lower price makes things easier to get. Then, on Aug. 29, Mylan announced it will sell a generic version of EpiPens at half the price — but keep selling the identical brand-name version at full price. Because, um, some people will be happy to spend twice as much as everyone else for their EpiPens?

❝ None of this, including the original price hike, makes sense if you think of brand-name pharmaceuticals as normal products whose prices are set by the forces of supply and demand. It does start to make sense if you picture drug pricing as a multisided, Machiavellian, long-running, high-stakes Game of Thrones involving drugmakers, insurance companies, pharmacies, pharmacy benefit managers, Congress, presidential candidates, and somewhere, down there in the smoke and dust, the children with life-threatening allergies who need to bring EpiPens to school this fall.

❝ This system has never worked well, but it’s working even less well now because of the profusion of high-deductible health insurance plans. Many ordinary Americans who haven’t reached their deductible limits are being exposed to high list prices that were intended to be no more than a starting point for negotiations between powerful institutional sellers and buyers. In other words, a price that was basically fake has become all too real. This is what Bresch argued in an interview on CNBC on Aug. 25: “It was never intended that a consumer, that the patients, would be paying list price, never. The system wasn’t built for that.”

❝ The EpiPen episode is a small part of the very big problem of high and rising drug prices. But even this small problem is kind of intractable. “Everyone in the system has built their economics and contracts on the list price that exists. It’s incredibly difficult to unwind that structure,” says Pembroke Consulting’s Adam Fein. “I can’t tell you there’s a simple solution. That’s why I’m not a politician.”

If we ever get serious about electing politicians who represent the needs of the great body of American citizens, ordinary folks, we might initiate a revision of the whole process. Put essential economics back into the loop. At least the threat of regulation and oversight might prompt industrywide action, reform.

Poisonally, I trust industry executives – especially the insurance industry – about as far as I can throw them uphill into a heavy wind. I think we’ll end up needing to reform the pharmaceutical industry as much as we need to continue to reform healthcare in general in this land.

Thanks, Barry Ritholtz